Having the Money Conversation

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Millennials have a tremendous advantage over their Baby Boomer parents because they are comfortable talking about money. Having grown up with social media and the internet, this generation is not as private as their parents and grandparents are, especially about subjects like money and finance. The advantage is that open conversations can reduce fears and increase understanding, which can result in better decision making.

Yet, with all this comfort in discussing financial matters, many Millennials are hesitant to meet with a financial advisor. It’s one thing to gather information from family and friends or read articles about investing, it’s another to discuss your personal information with a financial advisor. That’s when it moves from theoretical to personal and that can create a great deal of fear and discomfort.

Why Fear Gets the Best of Us

How Much Do You Really Know About Finances? As educated professionals, it’s common to feel like you should know everything. After all, if you don’t understand it, a few internet searches should provide the answers!

When it comes to money matters, though, many Millennials feel like a fish out of water. Internet searches can provide information that’s both confusing and conflicting, and that doesn’t answer individual questions about strategy and direction.

Then there is the question of what information can be trusted. Is the site legitimate and can the writer’s – and site’s – motivation be trusted? While financial information is plentiful, much of it’s either very general or coming from a sales site that promises a secret formula that will turn you into a millionaire.

Financial decisions by nature are very individual and personal. Because there’s no one-size-fits-all investing strategy, personal consultations are invaluable.

Advisor motivations. Can the advisor be trusted? A trusted advisor needs to understand your circumstances, goals, dreams, and aspirations. Once they do, they can help to create a long term strategy that will help to make those dreams a reality. But you must be able to trust that your advisor will make recommendations that are most beneficial to you, the client, not the best for them, the advisor.

Addressing these concerns in an open conversation will go a long way. No one wants to be sold a product. We all want to invest money in a sound strategy. Understanding the reasons for the recommendation will help you understand how it may benefit you and help you pursue your long term goals.

Fear of not being understood. As complicated individuals we want to appear like we have everything in order. In reality, sometimes we’re confident, other times not so much.

Financial advisors have seen nearly every level of financial preparedness. They have seen financial messes and worked with clients to get things corrected. They have seen strong portfolios, weak portfolios, no portfolio, and everything in between.

Even if you don’t feel you have all your ducks in a row, an advisor can help. If you’ve made bad decisions in the past, they can make recommendations for corrective action. If you’ve been unable to get things in order on your own, working with a professional can be the fastest way to get on track.

Markets not doing as expected. This can go two ways. If you invest conservatively and the market takes off you might end up kicking yourself for not being more aggressive. If the markets are slow and you invest aggressively you can end up wishing you’d been more conservative.

When you meet with an advisor, you’re meeting with a professional who understands the investment business and who can make recommendations that are consistent with your financial goals. An advisor does not have a crystal ball; remember that long term investing is not about beating the markets, it’s about making strong financial decisions that over time will lead to increased confidence in financial matters.

Pulling the Trigger

The first step is always the hardest. This is true whether you’re trying to establish a workout routine, learn a new language, start a new job, or change your investing strategy. Resisting change is natural and we are creatures of habit. However, there comes a point when, in order to grow and progress, we have to stop making excuses and get started by meeting with a financial advisor.

Make the appointment. Even if you don’t think you know enough, have enough money to invest, have a good enough paying job, or whatever the excuses for delays have been.

Before you meet with the advisor, write down questions you have. What things have you heard and what things do you want to understand. This can guide the conversation as you begin to develop a relationship with an advisor.

A financial advisor at Sherman Wealth is someone you’ll want to get to know! You’ll want them to know everything about you and your family’s needs. As your advisor learns more about you, they’ll be able to make the appropriate recommendations as opportunities arise.

Learn more about our Financial Advisor services.

Related Reading:

The Top 10 Questions to Ask a Financial Advisor
Transparency on Both Sides

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5 Things Investors Get Wrong

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Humans have a tendency to behave irrationally when it comes to money. Here are the five things investors get wrong that can harm their returns.

Believing They Will Beat the Market

Study after study shows that investors, including professionals, continually under perform the S&P.

In their most recent SPIVA (S&P Indices vs. Active) report, released in September, McGraw Hill Financial found that more than 85% of all funds underperformed the S&P 500, the index found to represent the overall market. (1).

What’s scarier is the fact that individual investors do even worse. In a 20 year study conducted by Dalbar, a financial services research firm, the average investor has seen a return of just 2.1% compared with the S&P’s annualized return of 7.8% (2).

What causes this under performance?

According to Dalbar the biggest reason for this under performance by investors is due to irrational behavioral biases. These include panic selling, under-diversifying, and chasing momentum (3).

Chasing Hot Stocks 

In a study done by the University of California Berkley, as well as UC Davis, researchers found that investors are much more likely to purchase shares in companies that have recently been in the news (4), bidding the price of these stocks up.

Additionally many investors make the mistake of trying to chase performance by buying investments that have already risen significantly. A 2011 study by Baird, a wealth management firm, suggests that investors generally chase short-term performance by buying funds that have risen in the short run, and selling those that have performed poorly (5).

The same can be said about the market as a whole where investors tend to purchase stocks after they have seen a large rise, and subsequently sell into weakness (6).

In short, investors sell low, and buy high.

Ignoring Fees 

You probably know that fees are important, what you may not realize is just how important they are.

Take for example two 30-year-old investors who each contribute $5,500 annually to their IRAs. They both achieve 9% annualized returns, before fees, over the next 35 years. The only difference between them is that one investor pays annual fees of .5%, while the other investor pays 2.5% in total fees. Over the course of their working career, investor A will have accumulated $1,059,859.21 in their account while investor B will have $682,190.80.

This is a hypothetical illustration only and is not indicative of any particular investment or performance. Return and principal value may fluctuate, so when withdrawn, it may be worth more or less than the original cost. Past performance is no guarantee of future results.

In this example, Investor B’s IRA will be worth less than 65% of Investor’s A account as a result of a 2% difference in fees!

Not Re-balancing

While buy-and-hold is usually a good strategy for most people, it is sometimes necessary for individuals to make slight tweaks to their investments.

This is particularly important if you have had one asset class or investment rise or fall significantly more than the rest of your portfolio. In this case it is a good idea to re balance your portfolio in order to realign it with your target allocation. This ensures that you not only maintain diversity, but also that you buy low, and sell high, by buying assets that have fallen significantly and selling assets that have risen.

Turning to the Wrong People for Advice 

Financial advice and information has never been more accessible to the average investor than it is today. Between TV and the Internet, investors are bombarded with information on a daily basis. Unfortunately not all of this information is sound.

Investors should consider carefully the source of any advice they receive, watching out for potential conflicts of interest. Before making any investment decisions you should carefully consider all options, and consider speaking with a financial advisor.

Learn more about our Investment Management services.

Related Reading:

Tips for Millennials to Understanding the Stock Market

What is Dollar Cost Averaging?

5 Big Picture Things Many Investors Don’t Do

Why and How to Get Started Investing Today

Mitigating Your Investment Volatility

The Psychology of Investing

Rebalance Your Portfolio to Stay on Track With Investments

Behavioral Investing: Men are from Mars and Women are from Venus!

References:

1. http://us.spindices.com/resource-center/thought-leadership/spiva/

2. http://www.thestreet.com/story/11621555/1/average-investor-20-year-return-astoundingly-awful.html

3. http://www.advisorperspectives.com/commentaries/streettalk_100814.php

4. http://faculty.haas.berkeley.edu/odean/Papers%20current%20versions/AllThatGlitters_RFS_2008.pdf

5. http://www.rwbaird.com/bolimages/Media/PDF/Whitepapers/Truth-About-Top-Performing-Money-Managers.pdf

6. http://theweek.com/articles/487000/sell-low-buy-high-are-investors-being-stupid-again

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